Your consulting firm was just granted an exclusive contract for your state. you nove must decide your pricing policy, given the following relationships:
P = $1400 - 0.0004Q
MR - $1400 - 0.0008Q
AVC = $1000
where p is the price, q is the quanity, and AVC the average variable cost
The firm will encounter no fixed cots, and all revenue is after taxes. As your firm has been granted an exclusive contact, your pricing and output decisions will be those of a monopolist.
Tasks:
1. Using the data above, calculate the output the firm will provide
2. Determine the price at this output level
3. Check whether your data is consistent with your calculations
Now assume that the state decides to give as many contracts as it can for the same activity, so your firm is now operating in a perfectly competitive market. How will your price and output decisions chage? Explain the differences and why these changes happened.